It follows a Prudential Regulation Authority (PRA) review of consumer lending – covering credit cards, personal loans and car financing over the first half of 2017 – which found executives were receiving inadequate information and may be missing warning signs along the way.
“Our main finding concerns weakness in management information and governance,” the letter to banking chairs said.
The PRA – which is part of the Bank of England – explained that some companies’ board risk committees “do not routinely receive sufficient standardised MI (management information) on consumer credit to recognise when a shift in asset quality or portfolio performance is taking place”.
The financial watchdog has stressed that “more systematic reporting” will be needed for banks that rely heavily on consumer credit.
It said that while the quality of consumer credit has “improved significantly” since the financial crisis, lenders were using the wrong benchmarks and placing too much weight on how consumer lending portfolios affected the firms under “benign conditions” – which could change under economic or financial stress.
“As a result, they have been underestimating the losses they could incur in a downturn,” the FPC explained.
The FPC said it believed that commercial banks were collectively exposed to potential losses of around £30 billion, representing about 20% of UK consumer credit loans, which was £10 billion more than previously estimated.
In its letter to lending bosses, the PRA did recognise that some firms showed signs of “effective risk management and controls for consumer credit and understood the risks in the their business” which included stricter underwriting standards such as reducing 0% interest credit card periods.
A number of lenders risk missing warning signs around rising consumer debt levels (Victoria Jones/PA)
It followed a grilling of Bank of England staff by MPs a day earlier, who asked whether banks were aware of the problem.
Treasury Select Committee member and Labour MP John Mann said he hoped further attention to the issue would help prevent another credit bubble.
“Stagnant real wages over recent years have meant many households have looked to credit cards and car loans to maintain their standard of living.
“I warned the Bank of England about their dangers in October.
“Back in 2008, early mortgage defaults were the first warning signs: I hope that evidence on this in recent weeks will lead to real action being taken to make sure that consumers and the wider economy don’t suffer from the burst of another bubble.”